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WASHINGTON — The Millennium Challenge Corp. signed a $500 million compact with Nepal on Thursday, the agency’s first compact in South Asia and a symbol, said some at the ceremony, of Nepal’s progress toward democracy.

The compact, which has been years in the making, also includes a commitment from the government of Nepal to contribute $130 million of its own funds toward the project, the largest upfront contribution from any compact country.

“This compact is a recognition of the progress Nepal has made in establishing the rule of law, democratic institutions, and investments in its people,” Jonathan Nash, the acting CEO of MCC, said at the signing ceremony Thursday. “It's an opportunity to help the country build its own capacity to deliver services to its own people to benefit the economy, regional security, and the broader global community.”

Nepal first passed the MCC scorecard — meaning it met at least 10 of a set of 20 indicators ranging from child health to fiscal policy to government effectiveness — in late 2014. In December 2014, MCC’s board officially approved Nepal for a compact and the deal has been in development since then.

A group of MCC and local economists first worked on a growth diagnostic to identify binding constraints that were impeding private sector investment. Through that process, they identified power and transportation as key barriers.

“Once we understand what drives the constraints, we look at interventions that could have impact,” said Fatema Sumar, the regional deputy vice president for Europe, Asia, Pacific and Latin America in MCC’s Department of Compact Operations.

In the power sector the problem was the transmission network, so the compact will work to build out 300 kilometers of transmission lines in the central part of the country to better link distribution networks. They will also work to develop substations and work on community projects to ensure that local communities, especially those in the areas where distribution lines are running, have access to power.

Part of the project will also help with technical and capacity building, particularly on the regulatory front, and the compact required that the government pass a new electricity regulatory bill, which they did in August.

Another component of the power project will be the construction of a second crossborder line with India so that Nepal can import power today, but also eventually export to India.

When they identified transportation as a constraint, what they determined was that the greatest need was not building new roads, but creating a better road maintenance system, Sumar told Devex. The compact will work to develop a road maintenance regime, increase funding for road maintenance, and help rehabilitate 300 kilometers of roads in the process.

In the past few months MCC has completed the final due diligence and feasibility work. Once the details of the compact were in place, MCC had to seek board approval, Nepal needed cabinet approval, and Congress had to approve the funds. That all came together to lead to Thursday’s signing ceremony in the State Department’s Treaty Room.

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During the ceremony, Deputy Secretary of State John Sullivan called Nepal’s progress during the past few years “a turning point” for the country.

“We look forward to a productive partnership, one that will create opportunity, build a stronger foundation for new investment, and help the people of Nepal lift themselves out of poverty. This is a priority for the United States,” he said. “A politically stable and prosperous Nepal serves not only the Nepali people but the broader region and the United States as well.”

Nepal’s minister of finance, whose department has worked closely with MCC to develop the compact, thanked the U.S. for its support in building a peaceful and democratic country.

“Today's signing ceremony is the epitome of the United States’ continued encouragement towards democratic development and lasting peace in Nepal,” Minister Gyanendra Bahadur Karki said Thursday. “[The compact] will surely have a lasting impact on Nepal's sustainable development for generations to come.”

The ceremony marked the end of one part of the process and the start of the next phase: implementation.

“It’s one of the most ambitious projects of any development donor project in Nepal,” Sumar said, both because of the host country model and the scope.

What happens now is that the Millennium Challenge Account Nepal will be set up and will serve as the implementing entity. It will be run by Nepalis, although MCC will play an oversight role, as it does with all compacts.

Challenges are likely to arise and five years is a tight timeframe for these types of projects, particularly in a country like Nepal. Complex capital infrastructure projects are difficult and the politics on the ground complicate matters as Nepal is a nascent democracy with local politics still trying to find its feet.

There are other hurdles: from complex land resettlement issues that will be a part of the construction process, to finalizing the bilateral agreement with India on the transmission lines.

But MCC sees challenges in all of its countries; there’s a reason, after all, that challenge is in the agency’s name, Sumar quipped.

While Nepal was the first in South Asia, in part because it expressed interest and was among the first to pass the scorecard, a compact is also being developed in Sri Lanka and is likely to be approved at the end of 2018.

About the author

Adva Saldinger is an Associate Editor at Devex, where she covers the intersection of business and international development, as well as U.S. foreign aid policy. From partnerships to trade and social entrepreneurship to impact investing, Adva explores the role the private sector and private capital play in development. A journalist with more than 10 years of experience, she has worked at several newspapers in the U.S. and lived in both Ghana and South Africa.

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